How much trouble is Mark Zuckerberg in?

It is night-time at the Soapstone Comedy Club. In fact, it always is. The club is a space in Horizon Worlds, Meta’s flagship metaverse app, where users can watch and perform comedy in virtual reality (vr). “It’s hard to do stand-up when you have no legs,” quips one performer, gesturing to his hovering avatar, before accidentally dropping the virtual microphone and floating offstage. A night out in vr lacks some of the atmosphere of a real bar, though it does cause authentic dizziness and nausea.

It is almost a year since Mark Zuckerberg announced that his company would change its name from Facebook to Meta, to reflect its commitment to the metaverse and, no doubt, to escape the firm’s toxic public image. Many were unsure what the word meant, but with the company’s value at a near-all-time high of $1.1trn, and its core social-network advertising business humming away on the back of a pandemic boom, investors were willing to indulge the experiment.

What has gone wrong? The sell-off of Meta stock began in February, after the company reported its first-ever drop in daily users of Facebook, its first and largest social network. After 18 years of uninterrupted growth it lost 1m of them between January and March (see chart 2). It has since bounced back, adding 39m more, while users of Meta’s “family of apps”, which includes Instagram and WhatsApp, have kept growing.

But the new users increasingly come from poor countries, and are therefore less valuable to advertisers. Last year Frances Haugen, a whistleblowing former Meta executive, claimed that in Facebook’s five most valuable markets, account registrations for under-18s had fallen by a quarter within a year. Meta has hurried out a new short-video product, Reels, to stem the bleeding to TikTok and other new rivals.

As users wobble, so do advertisers. In the second quarter Meta’s revenue fell year on year, for the first time in its history (see chart 3). Inflation, interest rates and war all played a part. But the ad business has been permanently changed by Apple’s new rules. These make it harder for apps to track users’ online activity, which in turn makes it harder to serve them relevant ads and see whether they work. Meta has said that Apple’s changes will cost it $10bn this year in forgone revenue. Companies are shifting their advertising to what admen call the bottom of the funnel: points at which the consumer is close to a purchase (Amazon, which serves ads to customers based on what they have just searched for, has been a big beneficiary).

Meta is better equipped than many of its rivals to overcome these obstacles. Reels already accounts for more than 20% of time spent on Instagram, and is making more money than Instagram’s successful Stories feature did at the same stage of its introduction, the company says. Heavy investment in artificial intelligence (ai) is helping Meta develop “probabilistic” ad models to replace the signal that was lost with Apple’s changes. Advantage+, a recent Meta ad product, uses ai to help advertisers develop and place ads.

A trickier ad business serves to widen Meta’s competitive moat, points out Mr Shmulik: smaller rivals like Snap, whose share price has fallen by nearly 90% in the past 12 months, are the real casualties. Still, Meta’s advertising franchise has probably been permanently impaired. And the company is scrambling to rebuild its ad business without the architect of its previous one, Sheryl Sandberg, who left the company last month.

All this would be enough to give investors jitters. The fact that Meta is simultaneously making a colossal bet on the metaverse threatens to test their faith to breaking point. Reality Labs, the company’s metaverse division, has so far run up losses of $27bn. Meta has sold more than 17m Quest 2 vr headsets, estimates idc, a data company, mostly at or below cost. It has also been on a hiring spree, last year announcing 10,000 new metaverse jobs in Europe. The pace of hardware development continues: on October 11th the company unveiled a more advanced Quest Pro headset, and Mr Zuckerberg showed off prototype hardware including a wrist-worn neural-input device. A Quest 3 and Quest Pro 2 are already in the works.

When—or whether—the metaverse will take off remains unclear. The Quest’s main use so far is gaming. Fitness is a growing niche, though Meta’s attempt to buy Within, a maker of vr fitness apps, has been blocked by antitrust regulators. The Quest Pro is aimed at businesses; on its launch this month Meta announced a partnership with Microsoft, which will provide vr versions of apps like Teams and Office. A “Quest for Business” subscription will be available next year.

But the social uses of vr, about which Mr Zuckerberg is most enthusiastic and where Meta should have the greatest advantage, remain unpopular. In February Meta reported that just 300,000 people had used Horizon Worlds; the firm has said nothing since. A leaked internal memo suggested that even company employees were having to be cajoled to use it (“If we don’t love it, how can we expect our users to love it?”).

Mr Zuckerberg is hardly the only one who sees potential in vr. In the first half of next year Apple is expected to release its debut headset, and Sony will launch its latest gaming-focused goggles for its PlayStation console. If headsets do become the new pcs, as Mr Zuckerberg has predicted, Meta will have a considerable first-mover advantage. The Quest 2 accounted for 88% of global vr headset sales in the first half of this year, says idc. The Quest Pro is the most advanced set of vr glasses around. Meta’s hiring binge means it has much of the top vr talent, says Jitesh Ubrani of idc. If Meta can control and tax a successful vr platform, as Apple and Google control their smartphone operating systems, it will own a gold mine (Meta already skims off as much as 47.5% from Horizon Worlds purchases).

The question is timing. Meta’s unusual structure gives Mr Zuckerberg total control. The firm’s board proved to be ineffective at dealing with Facebook’s scandals over privacy and misinformation. Now, rather than urge caution, it has allowed a flawed chief executive to gamble billions on the metaverse. In May Mr Zuckerberg admitted as much when he told Protocol, a news site: “If people invest in our company, we want to be profitable for them…But I also feel a responsibility to go for it…[Meta] is a controlled company, so I can make more of these decisions than most companies would.”

Yet the more Meta’s core business wobbles, the less investors will be willing to give Mr Zuckerberg’s metaverse plans the benefit of the doubt. A company can only spend that much on a new idea if investors are willing to fund it. They might be willing if “your core profitability from your core business is on solid footing”, says Mr Shmulik. That is Meta’s difficulty. “The core isn’t on a solid footing at the moment.”

To calm investors’ nerves, Meta is reining in its spending a little. It expects its total expenses this year to be about $7.5bn lower than it forecast at the end of last year. It has scrapped some projects, including a smart watch that was in development, and bumped up the price of the Quest 2 by $100. And it expects to reduce its headcount.

Meta executives compare the company’s predicament now to ten years ago, when it was managing the transition of its social network to mobile. Shifting a billion Facebook users from desktop to phone was no mean feat, made harder by the fact that Mr Zuckerberg was late to spot the importance of mobile. That experience may have influenced his approach to the metaverse. Meta’s new vr technology, he said on October 11th, was for those “who’d rather be early than fashionably late”. The risk, as investors grow impatient, is that this time Meta has made its move too soon. ■